Chronicle of a War Foretold: The Macroeconomic Effects of Anticipated Defense Spending Shocks Articles uri icon

publication date

  • January 2017

start page

  • 1568

end page

  • 1597

issue

  • 603

volume

  • 127

International Standard Serial Number (ISSN)

  • 0013-0133

Electronic International Standard Serial Number (EISSN)

  • 1468-0297

abstract

  • We identify news shocks to US defence spending as the shocks that best explain future movements in defence spending over a five‐year horizon and are orthogonal to current defence spending. Our identified shocks, though correlated with the Ramey (2011) news shocks, explain a larger share of macroeconomic fluctuations and produce significant demand effects. News about increases in defence spending induces significant and persistent increases in output, hours worked, inflation and the interest rate, and significant increases in investment, consumption and the excess returns of defence contractors on impact.

subjects

  • Economics

keywords

  • svar; maximum forecast error variance; defense news shocks; dsge model